To constitute a negotiable instrument (both notes and drafts), an instrument must be either order paper or bearer paper.

What is order paper?

Order paper must include the words pay to the order of (identified person) or to (identified person) or order. Including the word order indicates that the instrument is not limited to only one person. That is, the payee of the instrument can designate someone else to receive payment. This generally requires the identified person to indorse (sign) the instrument. Signing the instrument makes it bearer paper, unless the signor identifies a person to whom the instrument is being transferred.

Note: If the note is simply made out to pay a particular person without the word order, it is not negotiable.

What is bearer paper?

If the commercial paper is made out to bearer or it is not made out to any specific person, it is bearer paper. It can be redeemed by any holder of the paper, subject to certain defenses.

Note: Bearer paper may also use the wording order. If the paper is made out to order of gift or order of cash or pay to order of (blank space) , it is bearer paper.

If all other requirements are met, the UCC provides an exception to the order paper or bearer paper requirement for commercial paper to be negotiable, but this exception does not apply to notes. Primarily, this exception applies to drafts drawn on third-party institutions that inadvertently leave off the to order language, but the nature of the paper is obvious.